CIBIL – the Credit Information Bureau of India Limited – is the organisation that banks and lenders go to in order to determine your credit-worthiness as it keeps a record of all the loans and credit cards that are registered under your name. It tracks your performance on these loans and credit card payments in order to create a realistic picture (as a numerical score and report) of whether you will be able to – or can be trusted to – repay a loan or credit card bill in the future.
It takes into account factors like:
- Payment regularity and default rate on loan repayments, EMI payments and credit card bill payments.
- Defaulted loans for which you’ve stood as a guarantor.
- The amount of credit limit you’ve utilized on your card – the higher, the worse for your score, as it shows that you’re pretty dependant on credit.
- A large number of personal loans and credit cards as compared to secured loans.
- Many recently approved loans or credit cards.
Let’s focus on the first thing that CIBIL looks at – payment regularity and default rate on loan repayments, EMI payments and credit card bill payments.
An education loan is viewed by CIBIL as any other loan – it is a line of credit that was extended to you by a bank on the condition that you would honour your EMI payments when they become due.
Harshala Chandokar, a Senior Vice President at CIBIL said that “The education loans have to be paid once one completes his/her course and gains employment.” Your life goals while taking out an education loan may have covered this possibility, where you finish your studies and use the grace period to find a job and start earning – thus enabling you to repay when EMIs become due.
More often than not, especially overseas, this plan fails and you are rendered unable repay your student loan / education loan. Mr. Chandokar went on to say that “Also, like any other loans and credit cards, education loans are also reported to CIBIL and get reflected in the borrower's CIBIL Report and impact the CIBIL TransUnion Score.” What this means is that if you’re stuck unable to pay – it will affect your ability to get loans and credit cards approved in the future.
The outstanding credit for education loans was Rs.63,800 crore as on March 31st, 2015, according to a CIBIL report. Education loans are usually taken out during the 4th quarter of the year. The report also stated that more loans are being taken out than ever before, with over 1,30,000 education loan accounts being opened in the 4th quarter of 2014. The average sanctioned amount per loan is also on the rise. It is currently around Rs.6,00,000, up from Rs.4,50,000 in the 4th quarter of 2013. Loans of over Rs.5,00,000 have also gone up by 30%, and loans for below Rs.1,00,000 has reduced to under 10% of the total loans sanctioned. This means that more people are taking larger loans, and this is a cause for concern for banks who have no security against recovering them.
There is some positive news, as the default rate (or delinquency rate) for education loans has showed a decline. The report states that “Delinquency for 90+ days amount overdue was around 3.50 per cent in fourth quarter of 2013 which has lowered to 2.70 per cent in fourth quarter of 2014.”
Having a low CIBIL score just out of college can have a lot of negative implications on your financial well-being.
- If you’re looking to build a start-up company – using the contacts, knowledge and ideas you’ve acquired from college – having a low CIBIL score will mean that you won’t be able to raise capital in the form of a loan from a bank. Effectively delaying the plans you made at college.
- You will have to work twice as hard – to pay off the loan, and to improve your credit rating.
- Most of your salary will be used up paying off education loans and the interest that compounds on it.
- Once you clear your loans and are free of debt, you’ll need to take on even more debt to improve your CIBIL score.
- A low CIBIL score is also being looked at by some employers as a measure of economic stability which translates into trustworthiness.
- A low CIBIL score means no credit card, which means a lot more difficulty in supplementing your income with short-term credit.
In an effort to counter the problems that defaulting on education loans brings, R Gandhi, the Reserve Bank of India’s Deputy Director has requested CIBIL to counsel the youth taking loans on good credit behaviour.
Some tips to avoid defaulting on education loans
- Take a smaller loan amount: As far as possible, try to fund your own education by requesting family members for assistance, or applying for scholarships. Scholarships are widely unused and a majority of prospective students qualify for some scholarship or the other.
- Make tuition fees a parameter when selecting a college: Most students focus on the credentials of the institute they wish to join, and don’t even consider other institutes that have the same standing offering similar courses. Considering tuition fees as a parameter could go a long way in ensuring your life after college is less difficult than it could’ve been.
- Get a part-time job: This applies to you if you’re studying abroad, as part time jobs in India don’t pay an amount that facilitates savings. Getting a part time job not only adds a decent amount to your bank balance thus reducing your dependency on credit, but also gives you valuable, verifiable experience that you can use on your resume. Companies prefer candidates with experience and exposure to real world work environments, which most college students don’t.
- Plan with incredibly meticulousness: If you’re left with no other choice than to take a huge education loan, the smart move would be to plan out the next 5 years with incredible detail. Plan what you’ll do in college, research what your course will qualify you for, research companies hiring for those qualifications, contact them if possible and request an internship, plan your expenses by scouring blogs and calculating the cost-of-living with the average salary for a fresher. You’ll literally need to plan out every aspect of your life till at least 2 years after college to get you started on the path to paying off your EMIs properly. Once you’re in that routine, you’ll pretty much be able to take care of yourself, but till you get there – your time and energies need to be regimented or you’ll fall into the pit of debt that has claimed so many.
Some points to keep in mind regarding CIBIL and lenders
- The report contains a numerical representation of your credit-worthiness on a scale from 0 – 900. Loans and credit cards only get approved for scores above 750.
- For those with a credit history of less than 6 months, an index score between 1-5 determines their risk level. 1 and 2 is high risk, 3 is medium risk, 4 and 5 are low risk.
- The report also contains comments and remarks left by lenders about your performance – it’s always good to stay in their good books and make payments on time.
- The credit history – positive or negative – stays for a minimum of 7 years if left untouched.
- Scores can also be represented as “NA” (Not Applicable) or “NH” (No History).
- You can greatly lower the chances of falling in to a pit of debt by avoiding taking a credit card while you also have an education loan running.